Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

It used to be that investing in offshore Philippine dollar bonds was a pretty safe bet.

Buoyed by the ever-strong flow of remittances from workers living overseas, banks in the Southeast Asian nation have become a natural depository for U.S. currency debt. As a result, the spread on the country's sovereign notes has been far lower than most nations that share the same BBB- Fitch credit rating.

Philippine dollar notes three-month decline

-0.55%

That's changing, however, because of the Philippines' outspoken newly elected president, Rodrigo Duterte. The country's securities are now the worst performing in JPMorgan's Asian Credit Index series over the past three months, down 0.55 percent.

Paper Safety

Spreads on credit-default swaps for the Philippines were much lower than other countries rated BBB-. Until Duterte arrived on the scene that is.

Sources: Bloomberg, CMA

If Duterte continues with his fiery rhetoric and controversial policies, bond investors can expect that premium to erode further, regardless of local dollar support. Thanks to remittances, liquidity will always be relatively high, but a big slice of demand still comes from international investors, and they're getting spooked.

Traveling Dollars

Remittances continue to increase and will keep on supporting local dollar liquidity in the Philippines

Source: Bloomberg

The trigger for an even deeper shift could come from credit-rating agencies. To date, the big three haven't altered the way they view the nation, largely because Duterte has committed to continuing the economic reforms begun by his predecessor, Benigno Aquino. Still, Duterte hasn't offered much in the way of his own policies so it wouldn't be too surprising if Moody's, S&P and Fitch do start to reassess the country's investment-grade score.

When it comes to a country's credit grade, balance sheet matters, but so does politics. History is awash with situations where sovereign scores were lowered or kept below investment grade because of a nation's political situation.

A little over five years ago, the Philippines was rated junk. Being relegated to that category again would increase its cost of borrowing, and have a ripple effect on the banking and corporate sectors.

If you believe that would be enough to stop Duterte from being controversial, then international bond investors have less to fear. If not, their rough trot could continue.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.